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MF scheme recategorisation makes fund selection easier for investors

Published On , 15 May 2018 By TOI

To make it easier for investors to invest in mutual fund schemes that suit their risk profile and financial Goals, markets regulator Sebi in October last year had asked all the fund houses in India to align all their schemes under a Sebi-guided broad framework. The regulator also gave the fund industry over six months to complete the process. It is now expected that by this month-end the process of recategorisation of all the schemes should be over.

Fund industry officials, financial planners and advisors, all agree that like any new process that has far reaching implications for a large number of people, there are lots of positives to Sebi’s move, but there some negatives too.

Firstly, they say, that investors, existing as well as those who are intending to invest in mutual funds, would be less confused about the nature of the schemes from various fund houses from their nomenclature. Clarity about the nature of the fund from their names could help bring in more investors into the industry’s folds, they said.

Sebi has categorised all the mutual fund schemes in five broad groups, which are further divided into a total of 36 categories. The five broad categories are: Equity, Debt, hybrid, solution-oriented and other schemes. Within these groups, there are sub-categories with Debt funds being divided according duration and accrual while Equity funds are divided by market capitalisation, tax treatment, sectoral exposure etc. The main objective behind recategorisation of MF fund schemes is to help investors select schemes easily than earlier and schemes should be “clearly distinct in terms of asset allocation, investment strategy etc,” Sebi said in its notification on the matter.

Industry players also said that under the new categorisation process, indeed the funds are very clearly defined and overlapping of schemes has been more or less reduced. “Earlier, the divisions among funds by their characters were not clearly defined which often gave rise to confusion among investors. Under the new categorisation process, that has been completely eliminated,” said a top official at a fund house.

On the negative side of the process is the fact that the process is too watertight which doesn’t leave almost any scope for the fund managers to deviate from their given mandate. In unusual market conditions this watertight rule could be tested, fund industry professionals said. Secondly, as the process is in its infancy, there could missselling by unscrupulous distributors to people who don’t understand the finer details.

“Investors should be on the guard before taking any decision to redeem their current investments and invest in a new set of schemes,” warned a Mumbai-based financial advisor. “Investors should not get rattled by the recategorisation process and look into the changes carefully to see if the new portfolio structure gels well with their overall portfolio strategy or not and then take a final decision,” the advisor said.

The recategorisation process is also leading to some changes to the portfolio of some of the fund, so that the funds’ portfolios are aligned with their stated objectives. This in turn would make comparison of funds difficult in the short run, industry players said. “This is, however, a temporary hurdle and should get smoothen out in a few months to a couple of years,” the advisor said.

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